How does HP work?
In most situations, you first need to put down a deposit on the car you want to buy. This is usually 10% or more of the vehicle’s value.
The rest of the value of the car will then be paid off in instalments over a period of 12 to 60 months (one to five years).
Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars. For second hand cars the annual percentage rate can vary from 4% - 8%. The lower the number the better. The rate could be higher for example because you don’t have a good credit score.
The loan is secured against the car, which is why you can’t own it until you’ve made your last payment, including paying the Option to Purchase fee.
Make sure you understand the terms and conditions of your loan before signing the contract. For example, once all repayments have been made you pay a final fee, known as the ‘Option to Purchase’, once you’ve paid this you’ll own the car. This is typically £100-£200, but it does vary so ask how much it will be.
Is HP right for me?
The answer to this may depend on whether you want to own the car.
Once all repayments have been made, you pay a final fee – referred to as the 'option to purchase' fee – to own the car outright. This covers the cost of transferring ownership to you, and is typically around £100-£200. It should be mentioned in the HP agreement you sign at the start – but if you can't find it, make sure you ask the dealer how much the fee is.
Let’s take an example of how much you'd pay in total…
Say you're buying a car priced at £14,000:
You pay a 10% deposit of £1,400, leaving £12,600 left to pay.
You borrow £12,600 over three years.
You get a 5% APR deal, meaning payments would be £378 a month (£13,608 for the three years).
After three years you can take ownership of the vehicle, paying a transfer fee of £200.
So in total you’d pay £15,208.
Remember! The car is owned by the finance company until the final payment and 'option to purchase' fee have been paid. Until then, you have no legal right to sell the car (though the finance company may let you if you ask, and use the proceeds to fully settle the finance agreement).
Hire purchase Q&A
Pros of hire purchase:
Flexible repayment terms (from one to five years) to help fit in with your monthly budget – but the longer the term the more you’ll pay in interest.
Relatively low deposit required (normally 10% of the car’s price).
Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
Once you’ve paid half the cost of the car, you might be able to return it and not have to make any more payments* – find out more about cutting car finance costs.
If you’re credit score is not that high it may be easier to get a hire purchase than an unsecured loan, as the car is used as collateral for the loan.
It does not usually come with milage restrictions.
You don’t need to find a large sum to purchase the car like with PCP.
Cons of hire purchase:
You don’t own the car until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away.
You can’t sell or modify the car over the contract term without getting permission first.
Your deposit and term length will affect your monthly payments. Your monthly payments are likely to be higher the smaller the deposit is and the shorter the term of the loan.
Until you’ve paid a third of the total amount payable the lender can repossess the car without a court order.
It can be an expensive route if you only want a short-term agreement.
*Paid off half the debt? You can return the car & walk away (https://www.moneysavingexpert.com/car-finance/hire-purchase/)
Known as a voluntary termination, there's a little-known clause in the Consumer Credit Act which allows you to get out of an HP agreement early. Provided you’ve repaid at least half the total amount owed, you can terminate the agreement and return the car to the finance company.
This is a handy clause in an HP contract if you find:
You no longer need the car.
You want to cut costs.
You can’t afford repayments.
You can get a similar car for a lower cost than you would by making the remaining payments.
If you decide to do this, the car should be in good condition when you hand it back. If not, you’ll have to pay for any outstanding repair work that needs doing.
If you're not yet halfway through the payments, you’ll need to pay the amount outstanding to reach halfway before you can get out of the agreement.
Important! If you decide to end the agreement early, make sure to get everything in writing and keep a copy so nobody can claim you have defaulted on your payments.
Who offers hire purchase?
When you buy a car, you’re likely to go to either an independent dealership (one that is run by a business and will stock vehicles from many brands) or a franchised (one that works with a manufacturer like Ford or Volkswagen etc).
Independent dealers will have a wider choice of cars, as it’s much easier for them to stock different manufacturers. You’ll also find mostly second-hand cars, which means typically vehicles are cheaper.
You won’t normally be able to find 0% finance deals or large deposit contribution deals, and APR will be around 5-10% - although you credit record will affect the rate you’ll be able to get.
Franchised dealers are the place to go for a new car – although remember new cars lose their value due to depreciation very quickly.
Franchises can also offer very competitive deals like 0% finance or contributions of between £500-£2,000 to a car deposit. These deals are more common on new cars, but you’ll also need a very good credit rating to quality for the best deals.